|Project Rationale and Linkage to Country/Regional Strategy
Following the change in the Government in West Bengal in May 2011, there have been discussions on the possible introduction of a comprehensive support program to bring public finances in West Bengal onto a stable and sustainable path while improving development financing in the state. Accordingly, the Department of Economic Affairs (DEA), the Government of India (GoI) wrote to ADB on 19 September 2011 requesting ADB to hold discussions with the Government of West Bengal (GoWB) in this regard.
West Bengal is a densely populated state, 4th largest in India, with a population of 91 million. West Bengal is strategically located in eastern India bordering Bangladesh, Bhutan, and Nepal. Despite many achievements in the recent past, the deteriorating fiscal situation in West Bengal has placed added pressures on public resources constraining the delivery of public goods and services in the state. Over the years, the state government disregarded maintaining sound and sustainable public finances, leading to highest deficit figures in 2010-2011 among all the states in India. The revenue and fiscal deficit figures recorded 3.7% and 4.6% of gross state domestic product (GSDP), respectively. Similarly, the own tax revenue at 4.6% of GSDP in 2010-2011 clearly reveals the lowest tax efforts among all the states in India. The committed expenditures of the government (on salaries, pensions, and interest payments alone) have almost exhausted the total revenue receipts of the state in recent years, requiring the state to undertake ever larger borrowings to finance these expenditures, thereby trapping the state in a vicious cycle of mounting current account (revenue) and fiscal deficits.
A major contributory factor to fiscal distress is the state's low tax revenue performance. The own tax to GSDP ratio in West Bengal stood at 4.6% in 2010-2011 as against the average of 7.3% in all general category states and 9.5% in Karnataka. Even the average of the special category states was higher than West Bengal. The underlying analysis of West Bengal public finances suggests that the inadequacies of tax administration is one of the important factors contributing to low tax to GSDP ratio.
The deteriorating fiscal situation of the Government of West Bengal (GoWB, the Government) has had negative consequences for GoWB's development agenda. In particular, the increase in debt and resulting debt service payments has reduced fiscal space limiting the ability of the Government to make effective use of public spending to meet its policy priorities. More directly, increasing interest payments has resulted in a large opportunity cost as the disproportionate share of the fiscal adjustment fell on capital spending. Indeed, capital outlay to GSDP in West Bengal has been declining from a low rate of 1.2% of GSDP in 1994-1995 to 0.4% in 2003-2004 and is currently the lowest in India (0.8% in 2010-2011). Accordingly, limited public funds available to finance investment as well as to preserve the capital stock through spending on operation and maintenance have had serious impact on the state's growth potential, and capacity to improve service delivery.
These have had an adverse impact both in terms of (i) effectively using the budget as an instrument to set policy priorities particularly through discretionary spending, and more importantly (ii) constraining investment both public and indirectly private investment and undermining economic growth and development in the state. Needless to say, these have also had serious implications for manufacturing growth in the state leading to narrowing of the commercial tax base.